Business context and reporting period
American Electric Power Company, Inc. (AEP) filed this combined, unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. AEP is an electric utility holding company; its principal segment is regulated utility generation, transmission and distribution. The filing also covers six separately reporting utility subsidiaries.
Financial results and condition
Unless noted otherwise, figures are for AEP consolidated and in U.S. dollars.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $4.333 billion | $4.064 billion | $11.672 billion | $10.993 billion |
| Operating income | $890 million | $1.025 billion | $2.439 billion | $2.177 billion |
| Income before extraordinary item | $657 million | $557 million | $1.365 billion | $1.040 billion |
| Net income | $930 million | $557 million | $1.638 billion | $1.040 billion |
| Earnings attributable to AEP common shareholders | $928 million | $555 million | $1.633 billion | $1.035 billion |
| Basic EPS | $1.92 | $1.16 | $3.39 | $2.16 |
Reported common EPS included a $0.57-per-share extraordinary gain in both 2011 periods. Excluding that item, EPS was $1.35 for Q3 and $2.82 for the nine months, versus $1.16 and $2.16, respectively, in 2010. Utility Operations income before extraordinary items was $642 million for Q3 and $1.376 billion for nine months, compared with $541 million and $1.017 billion.
- Cash flow: Nine-month operating cash flow was $3.338 billion, compared with $1.702 billion. Investing cash outflow was $1.967 billion, including $1.849 billion of construction expenditures; financing cash outflow was $1.119 billion. Period-end cash was $546 million, up from $294 million at the start of the period.
- Debt and capitalization: Total debt was $17.729 billion at September 30, 2011, versus $18.157 billion at year-end 2010. Debt-to-total capitalization declined to 54.6% from 57.0%; AEP reported covenant-defined debt-to-capitalization of 50.3%, below its 67.5% limit.
- Liquidity: Net available liquidity was approximately $3.164 billion, including $3.25 billion of revolving credit commitments and $546 million of cash, less commercial paper outstanding and letters of credit.
- Utility gross margin: Utility Operations gross margin was $2.465 billion in Q3, slightly below $2.480 billion a year earlier; nine-month gross margin was $6.851 billion, compared with $6.760 billion.
Material changes versus prior period
- Net income rose substantially, primarily reflecting the reversal of a prior Texas restructuring-related disallowance: the Texas Supreme Court ruling led to a $421 million pretax gain ($273 million after tax) recorded as an extraordinary item. AEP also recognized $261 million of pretax carrying-cost income associated with the Texas capacity-auction true-up.
- Operating income declined in Q3 despite higher revenue, in part because of $90 million of plant impairments and other related charges, higher fuel and purchased-power costs, and operating expenses. Nine-month operating income increased, helped by lower costs following 2010 cost-reduction actions and higher rates.
- Ohio customer switching reduced generation and transmission-related gross margin by approximately $41 million in Q3 and $94 million for the first nine months. Higher rates, weather-related usage and other revenues partly offset the impact.
- Q3 impairments included $48 million for Sporn Unit 5, which AEP no longer expects to operate, and $42 million for the Muskingum River Unit 5 flue-gas-desulfurization project. AEP also recorded Ohio refund provisions related to POLR charges.
- AEP’s debt-to-capitalization ratio improved, while construction spending increased to $1.849 billion from $1.629 billion for the comparable nine-month period.
Outlook, management commentary and principal risks
- The filing does not provide a clear numerical full-year earnings or revenue guidance figure. Management cautions that interim results are not necessarily indicative of full-year results.
- AEP expects the 600-MW Turk coal plant to enter service in 2012. SWEPCo’s share of estimated construction costs is $1.3 billion, plus $129 million for transmission, excluding AFUDC. Litigation and permitting issues remain; an injunction restricts certain wetlands, water-intake and transmission work. Management expects completion but warns that failure to complete or recover the investment could materially affect results, cash flows and financial condition.
- AEP estimates system-wide investment of approximately $6 billion to $8 billion from 2012 to 2020 to address proposed environmental requirements. Potential early retirements identified total 5,056 MW. Final rules, compliance costs, rate recovery and reliability effects remain uncertain.
- The Texas capacity-auction true-up regulatory asset totaled $682 million at September 30. TCC’s proposed carrying-cost calculations through anticipated securitization ranged from $396 million to $756 million; the PUCT will determine the final amount.
- Ohio regulatory outcomes remain important, including POLR refunds, recovery of OPCo’s $542 million fuel-adjustment deferral (excluding unrecognized carrying costs), distribution rate cases and the proposed CSPCo-OPCo merger and generation-market transition.
- Other material exposures include pending rate proceedings, environmental regulation and litigation, fuel and wholesale power prices, weather and storms, credit and interest-rate risks, and Cook Plant Unit 1 repair-cost recovery. Cook Unit 1 repair and replacement costs could reach approximately $408 million; insurance, warranty and regulatory recoveries remain subject to review.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. AEP also announced plans to redeem subsidiary preferred stock in December 2011.
Important facts for investors to verify
- Separate recurring earnings from the $273 million after-tax Texas extraordinary gain and assess how much recognized carrying-cost income is nonrecurring or dependent on future regulatory action.
- Track the PUCT’s final capacity-auction true-up and carrying-cost determination, securitization timing and cash collection.
- Confirm PUCO outcomes for Ohio refunds, deferred fuel recovery, distribution rates, merger approval and the proposed ESP.
- Monitor Turk Plant construction, outstanding permits and litigation, remaining commitments and the recovery of construction costs in rates.
- Evaluate the scale, timing and rate recovery of environmental compliance spending and any resulting generation retirements.
- Review cash-flow sustainability, construction funding, debt maturities and available liquidity; nine-month operating cash flow included significant working-capital and regulatory-accounting effects.